By Bob Sullivan Technology correspondent
msnbc.com
updated 7/29/2004 6:57:10 PM ET 2004-07-29T22:57:10

Millions of PayPal users received an e-mail this week offering them a chance to receive a little money just for filling out an online form -- and for once, the e-mail wasn't a fake.

The notice tells PayPal customers that they may be eligible to receive payment as part of a class-action lawsuit settlement the eBay-owned Web signed last month. The suit alleged that, beginning in 1999, PayPal unfairly froze thousands of user accounts, preventing consumers from getting access to their money. 

In the settlement, PayPal agreed to set aside $9.25 million to compensate users who feel they were treated unfairly. The company admits no wrongdoing.

"We believe that based on the information we've been provided that it's a fair settlement," said A. J. De Bartolomeo, the attorney for one of the plaintiffs who filed the suit.

Starting this week, consumers can log in to a special Web site and sign up for a portion of the money by filling out a complaint form and documenting their experience. Anyone who had their PayPal account frozen, or did not receive a timely response from PayPal customer service related to an account freeze, is eligible.

Depending on how many consumers sign up for the settlement, individuals may only receive a tiny sliver of that cash. But the settlement also imposes other restrictions on PayPal, says Eric Gray, who operates PayPalSucks.com, and that's the real good news. Now, PayPal will have to detail its fraud case to the consumer when the firm freezes an account.

"Money is not the big victory. This will pull PayPal into responsible business practices. That's the victory," Gray said.

PayPal spokeswoman Amanda Pires said long ago the firm had improved its freeze procedures, and now works to loosen restrictions on consumers' accounts within two hours.

"Most of the items in the settlement PayPal has long ago complied with," she said.

Some businesses crippled
Account freezes became an issue in 1999, when PayPal became one of the main ways that eBay users paid for their auction purchases. As the system grew quickly, so did incidences of fraud. PayPal, which was later purchased by eBay, took to freezing member accounts -- at times for months -- while the firm investigated fraud complaints. Since PayPal is not a bank, it is not regulated by federal banking laws, and innocent users often didn't know how to go about getting their money back.

Some eBay users claimed such account freezes crippled their trading activity, and at times, their livelihood, said online auction watchdog Rosalinda Baldwin.

"People said they were bankrupted by this," Baldwin said.

Claimants can file either a long or a short form in the case. Short form filers can only apply for up to $50, De Bartolomeo said. The payout for all such claims is capped at $1 million.

The rest of the money set aside will be distributed to those who chose to fill out a long form, requiring much more documentation.

The e-mail notification of potential participation in the class action lawsuit was a bit unusual, and consumers were skeptical this week when the e-mails began to arrive -- many believed the e-mail was an attempt to steal personal information, known as a "phishing" e-mail.

"This email below looks legit but I am still suspicious of it," wrote one in an e-mail to MSNBC.com "I have not had any problems with my PayPal account so I have no reason to participate in this class action lawsuit...if there really is such a thing."

PayPal agreed to send an e-mail to every customer it had -- ten of millions of e-mails, Pires said.

Some alert consumers forwarded the e-mail to PayPal, asking if it was hoax -- and got an automated reply saying it was, De Bartolomeo said. 

"We were not happy about that," she said. PayPal agreed to fix the problem quickly, she said.

MSNBC's Bob Sullivan is the author of the upcoming book "Your Evil Twin: Behind the Identity Theft Epidemic."

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